Graft Probe finds Flaws in China’s Financial Institutions
Heads of Chinese financial bosses and regulators likely to roll
By: Toh Han Shih
Corruption and other problems in Chinese financial regulators, stock exchanges, and financial institutions have degraded China’s strength as an international financial center according to a report on a state anti-corruption inspection of 25 Chinese financial institutions, financial regulators, and bourses announced on February 24.
Corruption risks were found in important areas, according to the findings. If anything, that is an indication that Shanghai, once China’s premier financial hub, is unlikely to return to pre-eminence to replace Hong Kong in the foreseeable future. There has been speculation that Beijing was considering replacing Hong Kong with a more obedient mainland city as the country’s top financial center, due to the rebellious ways in the former British colony with its Western financial controls, the sanctity of contract, and the rule of law.
For nearly all the 25 organizations, a common problem found was insufficient loyalty to Chinese President Xi Jinping. On one hand, this indicates Xi’s powerful control over the nation’s financial sector. On the other, it indicates many major financial regulators, exchanges and financial institutions disobey their leader to some degree. For all 25 organizations, evidence of possible corruption was found in their top officials, which means some are certain to be arrested, an indication that China’s anti-corruption campaign, which began under Xi in late 2012, will continue in the nation’s financial sector, as stated by China’s anti-graft czar Zhao Leji on January 18.
The anti-corruption inspections were launched last October. They include the stock exchanges of Shanghai and Shenzhen, the stock exchange regulator, the banking and insurance watchdog, and China’s Big Four state-owned banks.
“There are shortfalls in the Shanghai Stock Exchange’s role in building up Shanghai as an international financial center,” said the findings on the Shanghai bourse, including inadequacies in the exchange’s efforts to raise the quality of its listed companies and to curb risk.
The Shanghai bourse did not sufficiently serve the nation’s major strategies, said the findings. Regulation of the exchange’s listed companies and its risk mitigation weren’t strong enough, while there are inadequacies in reform and internal governance, with corruption risk existing in important areas and among key officials, the findings added.
Problems with regulators
China’s stock market regulator, the China Securities Regulatory Commission (CSRC), “was not strong enough in preventing and regulating the illegal and irregular actions of listed companies,” said the findings on the commission. “The legal system of the capital markets is inadequate.”
“There exist corruption risks in important areas and key officials (of CSRC), with a fairly outstanding problem of the ‘revolving door’ among regulators and businessmen,” the findings added.
Likewise, there are corruption risks in major areas and key officials in the China Banking and Insurance Regulatory Commission (CBIRC), said the anti-graft inspection’s findings on the CBIRC. “The problem of using regulatory powers for personal gain frequently occurred within the system, the problem of the ‘revolving door’ among regulators and businessmen was fairly prominent.”
On February 10, the official Chinese anti-corruption website announced the arrest of Cai Esheng, a former vice chairman of the banking regulatory commission, which has been merged into CBIRC, for using his influence to obtain bribes and abuse of power.
The banking and insurance regulator’s policies were not clear enough, causing shortfalls in the deployment of financial resources to serve national strategies, the findings added.
Problems with financial institutions
The anti-corruption inspection also found problems with three financial institutions which play important roles in lending money to projects of the Belt and Road Initiative, China’s ambitious plan to connect with other countries through infrastructure projects like ports and roads. The China Development Bank and the Export-Import Bank of China (China Exim Bank) are the two main state-owned policy lenders which disbursed billions of dollars to Belt and Road projects. China Huarong Asset Management, the biggest Chinese state-owned manager of bad assets, also finance Belt and Road projects. There have been persistent problems with corruption, as the adjoining story on Indonesian BRI projects has shown.
On April 9, 2015, an article in Beijing Review quoted Huarong’s then-chairman Lai Xiaomin saying Huarong could seek business opportunities in Belt and Road projects. Lai was executed for corruption on January 29, 2021, only 24 days after receiving the death sentence from a Chinese court, which was unusually harsh and swift by today’s standards of Chinese justice, Asia Sentinel earlier reported.
Huarong “has not reflected deeply enough on the case of Lai Xiaomin, has not sufficiently eradicated his influence, and the pursuit of responsibility was inadequate,” said the anti-graft inspection’s findings on Huarong on February 24, a statement that indicates Lai’s accomplices are still at large within Huarong and are targeted for arrest.
Ironically for China’s biggest manager of bad assets, the findings said Huarong was weak in its management of bad assets, with corruption risks in the important areas of due diligence on projects and valuation of assets.
As with Lai, the findings on China Development Bank called for “deeply eliminating the malignant influence” of the policy bank’s former chairman Hu Huaibang. In January 2021, Hu was sentenced to life in prison by a Chinese court for bribery.
Corruption risks were discovered in loans extended by China Development Bank, the findings added. Similarly, China Exim Bank illegally handed out loans, while corruption risks reside in some important areas, according to the findings on this policy bank. Other corruption risks were found in loans extended by the Big Four state-owned banks – Bank of China, ICBC, China Construction Bank, and Agricultural Bank of China, according to the anti-graft probe.
Toh Han Shih is chief analyst of Headland Intelligence, a Hong Kong risk consultancy.